Musk Has Heavily Leveraged His Holdings Of Tesla While Tesla’s Financial Leverage Has Risen

&l;span style=&q;font-weight: 400&q;&g;I was amazed at the reaction to &l;/span&g;&l;a href=&q;https://www.forbes.com/sites/jimcollins/2018/05/14/tesla-executives-continue-to-flee-as-the-company-goes-rogue-with-its-balance-sheet/#3ac853546382&q;&g;&l;span style=&q;font-weight: 400&q;&g;my previous &l;/span&g;&l;i&g;&l;span style=&q;font-weight: 400&q;&g;Forbes&l;/span&g;&l;/i&g;&l;span style=&q;font-weight: 400&q;&g; article&l;/span&g;&l;/a&g;&l;span style=&q;font-weight: 400&q;&g; on Tesla. &a;nbsp;By simply reading Tesla&s;s 10-Q I was able to find a detail–on May 3rd the company added its Fremont factory to the collateral package supporting its revolving credit agreement–that most had missed and that other news services picked up on throughout the day Monday after my article appeared.&l;/span&g;

&l;span style=&q;font-weight: 400&q;&g;Why didn&s;t sell-side analysts catch the fact that Tesla had mortgaged the company&s;s most important physical asset? &a;nbsp;Well, to be fair, Tesla did not file its 10-Q until May 10th despite reporting earnings on the 2nd. Given the theatrical performance CEO Elon Musk delivered on Tesla&s;s first quarter conference call that evening, though, no one should be surprised that not all pertinent information was divulged.&l;/span&g;

&l;span style=&q;font-weight: 400&q;&g;For many investors the calculus is simple; Musk is Tesla and Tesla is Musk. &a;nbsp;His roles as Chairman, CEO and largest shareholder are inextricably intertwined. &a;nbsp;That said, the extent to which Musk has used his stake in Tesla as collateral to support personal indebtedness is not necessarily well known. &a;nbsp;So, in the continuing spirit of forensic analysis, I decided to comb through Tesla&s;s proxy statements to measure Musk&a;rsquo;s level of personal leverage. &a;nbsp;&l;/span&g;

&l;img class=&q;dam-image getty size-large wp-image-955904878&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/955904878/960×0.jpg?fit=scale&q; data-height=&q;639&q; data-width=&q;960&q;&g; NEW YORK, NY – MAY 07: Business magnate Elon Musk enters the Heavenly Bodies: Fashion &a;amp; The Catholic Imagination Costume Institute Gala at The Metropolitan Museum on May 07, 2018 in New York City. (Photo by Ray Tamarra/GC Images)

&l;span style=&q;font-weight: 400&q;&g;The figures are startling. &a;nbsp;As of year-end 2017 Musk was using more than 40% of his Tesla shares as collateral for loans. &a;nbsp;The 13.8 million shares Musk pledged as collateral amounted to a staggering $4.29 billion worth of Tesla stock based on TSLA&a;rsquo;s closing price on December 29th. &a;nbsp;Obviously those figures are not reported in real-time, but market reports on Musk&s;s much-hyped purchase of 33,000 Tesla shares last week–which amounted to a 0.1% increase in his total holdings of Tesla stock–are really inconsequential. &a;nbsp;The table below displays&a;nbsp;Musk&a;rsquo;s Tesla holdings and borrowings against those holdings since the company&a;rsquo;s IPO in 2010. &l;/span&g;

&l;!–nextpage–&g;

&a;nbsp;

&l;div class=&q;table-wrapper&q;&g;&l;table&g;&l;tbody&g;&l;tr&g;&l;td&g;in millions&l;/td&g;

&l;td&g;2010&l;/td&g;

&l;td&g;2011&l;/td&g;

&l;td&g;2012&l;/td&g;

&l;td&g;2013&l;/td&g;

&l;td&g;2014&l;/td&g;

&l;td&g;2015&l;/td&g;

&l;td&g;2016&l;/td&g;

&l;td&g;2017&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td&g;Musk shares pledged&l;/td&g;

&l;td&g;4.5&l;/td&g;

&l;td&g;4.500&l;/td&g;

&l;td&g;9.470&l;/td&g;

&l;td&g;10.025&l;/td&g;

&l;td&g;7.425&l;/td&g;

&l;td&g;9.420&l;/td&g;

&l;td&g;11.451&l;/td&g;

&l;td&g;13.775&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td&g;Musk shares owned&l;/td&g;

&l;td&g;&a;nbsp;25.7&l;/td&g;

&l;td&g;&a;nbsp;27.132&l;/td&g;

&l;td&g;&a;nbsp;27.203&l;/td&g;

&l;td&g;&a;nbsp;28.289&l;/td&g;

&l;td&g;&a;nbsp;28.289&l;/td&g;

&l;td&g;&a;nbsp;28.371&l;/td&g;

&l;td&g;&a;nbsp;33.504&l;/td&g;

&l;td&g;&a;nbsp;33.632&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td&g;Leverage Ratio (%)&l;/td&g;

&l;td&g;&a;nbsp;17.51&l;/td&g;

&l;td&g;&a;nbsp;16.59&l;/td&g;

&l;td&g;&a;nbsp;34.81&l;/td&g;

&l;td&g;&a;nbsp;35.44&l;/td&g;

&l;td&g;&a;nbsp;26.25&l;/td&g;

&l;td&g;&a;nbsp;33.20&l;/td&g;

&l;td&g;&a;nbsp;34.18&l;/td&g;

&l;td&g;&a;nbsp;40.96&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td&g;TSLA total shs. out.&l;/td&g;

&l;td&g;97.6&l;/td&g;

&l;td&g;108.9&l;/td&g;

&l;td&g;&a;nbsp;114.2&l;/td&g;

&l;td&g;&a;nbsp;123.1&l;/td&g;

&l;td&g;&a;nbsp;125.7&l;/td&g;

&l;td&g;&a;nbsp;131.4&l;/td&g;

&l;td&g;&a;nbsp;161.6&l;/td&g;

&l;td&g;&a;nbsp;168.8&l;/td&g;

&l;/tr&g;&l;/tbody&g;&l;/table&g;&l;/div&g;&l;span style=&q;font-weight: 400&q;&g;How is Musk using the money he has borrowed against his Tesla shares? &a;nbsp;The only hints as to the parameters of that leverage came from disclosures in Tesla&s;s prospectus for its March 17, 2017 offering of equity and convertible notes. &a;nbsp;That document divulged that Musk had loans secured by his personal Tesla holdings from Morgan Stanley (one of the underwriters of the offering) totaling $344.4 million and from institutions not involved in the offering of another $279.9 million. It&s;s impossible to know exactly how much Musk has borrowed against that collateral, but his penchant for start-ups–SpaceX, The Boring Company, Hyperloop One, etc.–is most likely consuming that cash. &a;nbsp;&l;/span&g;

&l;span style=&q;font-weight: 400&q;&g;The problem is that Tesla&a;rsquo;s humongous cash burn–which I have chronicled in a &l;a href=&q;https://www.forbes.com/sites/jimcollins/2018/05/03/elon-musks-bizarre-conference-call-shouldnt-obscure-teslas-financial-woes/&q;&g;series of articles for &l;em&g;Forbes&l;/em&g;&l;/a&g;–has put the company itself in a precarious financial position. &a;nbsp;As the second table below shows, Tesla&a;rsquo;s financial leverage is at recent highs. Negative cash flows necessitate more borrowing, and it is truly a vicious cycle. &l;/span&g;

&l;div class=&q;table-wrapper&q;&g;&l;table&g;&l;tbody&g;&l;tr&g;&l;td&g;&a;nbsp;$, mm&l;/td&g;

&l;td&g;4Q16&l;/td&g;

&l;td&g;1Q17&l;/td&g;

&l;td&g;2Q17&l;/td&g;

&l;td&g;3Q17&l;/td&g;

&l;td&g;4Q17&l;/td&g;

&l;td&g;1Q18&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td&g;Total Debt&l;/td&g;

&l;td&g;&a;nbsp;7,512&l;/td&g;

&l;td&g;&a;nbsp;8,521&l;/td&g;

&l;td&g;&a;nbsp;8,105&l;/td&g;

&l;td&g;&a;nbsp;9,924&l;/td&g;

&l;td&g;&a;nbsp;10,167&l;/td&g;

&l;td&g;&a;nbsp;10,466&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td&g;Equity&l;/td&g;

&l;td&g;&a;nbsp;5,538&l;/td&g;

&l;td&g;&a;nbsp;5,797&l;/td&g;

&l;td&g;&a;nbsp;6,215&l;/td&g;

&l;td&g;&a;nbsp;5,775&l;/td&g;

&l;td&g;&a;nbsp;5,235&l;/td&g;

&l;td&g;&a;nbsp;5,315&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td&g;Leverage Ratio&l;/td&g;

&l;td&g;&a;nbsp;1.36&l;/td&g;

&l;td&g;&a;nbsp;1.47&l;/td&g;

&l;td&g;&a;nbsp;1.30&l;/td&g;

&l;td&g;&a;nbsp;1.73&l;/td&g;

&l;td&g;&a;nbsp;1.94&l;/td&g;

&l;td&g;1.97&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;td&g;&l;/td&g;

&l;/tr&g;&l;/tbody&g;&l;/table&g;&l;/div&g;

So, Musk has steadily increased his personal leverage to a company that has been steadily increasing its financial leverage. &a;nbsp;That&s;s a double whammy. It&s;s too much financial engineering. In following other companies I have experienced situations in which a CEO faced margin calls as his company&s;s share price dropped. &a;nbsp;It is not pretty, and obviously adds incremental selling pressure to an existing decline.

&l;span style=&q;font-weight: 400&q;&g;Leverage acts to increase returns on equity when times are good and to hasten the demise of indebted companies when times are bad. &a;nbsp;That&s;s the key point here. Despite disrupting a century-old industry and creating the most important product in that industry in decades (the Model S) Tesla has &l;/span&g;&l;b&g;&l;i&g;never&l;/i&g;&l;/b&g;&l;span style=&q;font-weight: 400&q;&g; had good times in terms of cash flow. &a;nbsp;&a;nbsp;Musk has used his Tesla holdings as ballast to try and conquer the universe, not just this planet, but as 2008-2009 should remind us, too much borrowing can cause any company to fall to Earth.&l;/span&g;

&a;nbsp;